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GST compensation dues: Here are full details of two borrowing options for states

The Centre said the prevailing economic situation is such that Central revenues are under greater strain than GST revenue and there is a very large borrowing requirement that they face this year

August 30, 2020 / 09:34 AM IST

The Government of India would be considering two options to make up for the Goods and Services Tax (GST) shortfall, it said in a statement on August 29.

"The prevailing economic situation is such that central revenues are under greater strain than GST revenue," the government said, adding that there is a very large borrowing requirement that they face this year.

On August 28, a report by economists from State Bank of India suggested three ways in which the GST shortfall could be covered. 

Here what you need to know about the two options:

Option 1:

Under the first option, the shortfall arising out of GST implementation (calculated at Rs 97,000 crore approximately) will be borrowed by states through the issue of debt under a Special Window coordinated by the Ministry of Finance.

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The attempt will be to maintain a steady flow of resources similar to the flow under GST compensation on a bi-monthly basis. The Centre will also be given special borrowing permission, over and above any other borrowing ceilings eligible under any other normal or special permission notified by the Department of Expenditure.

The interest on the borrowing under the Special Window will be paid from the compensation cess as and when it arises until the end of the transition period. After the transition period, principal and interest will also be paid from the proceeds of the cess, by extending the cess beyond the transition period for such period as may be required. The states will not be required to service the debt or repay it from any other source.

As far as the compensation cess is concerned, it will be continued even after the transition period until all arrears of compensation for the transition period are paid to the states.

The first charge on the compensation cess each year would be the interest payable; the second charge would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the interest and principal are paid.

Option 2:

The entire shortfall of Rs 235,000 crore (including the Covid-impact portion) may be borrowed by states through the issue of market debt. The Centre will issue an OM committing to repayment of principal on such debt from cess proceeds.

The interest shall be paid by the states from their resources.

The principal on the amount will, after the transition period, be paid from proceeds of the cess. The states will not be required to repay the principal from any other source.

To the extent of the shortfall arising due to implementation of GST (i.e. Rs 97,000 crore approximately in aggregate) the borrowing will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc.

The compensation cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the states. The first charge on the future cess would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the principal is paid.

"Borrowing by states typically incurs a higher interest cost than borrowing by the Centre," the government said, adding that it has factored this into the conception of these two options with a view to protect the states so that they are not adversely affected.

 
Moneycontrol News
first published: Aug 29, 2020 06:07 pm

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